Abstract

This paper argues that when EU member states joined EMU, this resulted in domestic institutional changes in the areas of fiscal policy-making and wage-setting. The paper argues that these changes were triggered by two facts: (i) in EMU, the monetary policy can no longer be used as an instrument for output stabilization; (ii) the "one size fits all" monetary policy of the ECB potentially destabilizes output in those countries whose economic data diverge from the euro area average. Assuming that EMU member states will seek to use fiscal policy or wage-setting in order to re-stabilize output, the theoretical part of the paper investigates the economic and political contexts in which these two instruments can be used as stabilizing instruments and specifies the institutional pre-conditions for successful stabilization. The paper then extrapolates potential problem-pressures resulting from the ECB monetary policy for each country and investigates whether the appropriate set of institutions to deal with this pressure had existed before EMU or whether institutional change could be expected as a reaction to it. In a comparative part, institutional changes that have taken place in ten member states since the start of EMU are assessed and compared to the theoretical expectations. The paper concludes that the asymmetric pattern of institutional adjustment in fiscal policy institutions and wage-setting institutions closely follows the approach presented in the theoretical part of the paper.